JPRS-CAR-9 1-0614 NOVEMBER 1991

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JPRS-CAR-91-061 CONTENTS 4 November 1991

INTERNATIONAL

UNITED STATES

Article Views Cambodian Policy [SHIJIE ZHISHI No 1082] .......................................................... I

ECONOMIC

NATIONAL AFFAIRS, POLICY

Progress, Problems of 'Double Guarantee' System [ZHONGGUO TONGJI XINXI BAO 15 Aug] . 3Increase Economic Efficiency, Continue Reform [JINGJI LILUN YU JINGJI GUANLI No 4] ..... 4Enterprises Face Pricing Problems [JIAGE YUEKAN No 7] ............................................................ 10Large, Medium-Sized Enterprises' Pricing Problems [JIAGE YUEKAN No 7] ............................. 12Shareholding Seen in New Construction Projects [TIGAI XINXI No 14] ...................................... 16

PROVINCIAL

Government Efforts To Improve Efficiency [SHAANXI RIBAO 8 Sep] ......................................... 18Jilin Chemical Company Increases Earnings [XINHUA] ................................................................. 24

FINANCE, BANKING

Commentary on Preventing Debt Chains [JINRONG SHIBAO 22 Aug] ....................................... 24Forum on False National Income Increase, Distribution [ZHONGGUO SHUIWU BAO 19 Aug] . 25Securities Trade Association Established [JINRONG SHIBAO 29 Aug] ......................................... 26Treasury Bonds Selling Briskly [LIAOWANG No 28] ..................................................................... 27Liaoning Clears Triangular Debts [LIAONING RIBAO 31 Aug] ..................................................... 30Private Financial Assets Increase Sharply [Hong Kong CHING-CHI TAO-PAO No 42] ................ 31

INDUSTRY

Government Constructs New Ethylene Plant [XINHUA] ................................................................ 31Construction of Steel Production Bases Steps Up

[Hong Kong CHING-CHI TAO-PAO No 38-39] .............................................................................. 32

LABOR

Income of Urban, Rural Residents Increases [ZHONGGUO XINWEN SHE] ............................... 32Handicapped Workers Employed by Welfare Businesses [XINHUA] ............................................. 32

PUBLICATIONS

Dictionary of Minority Arts Published [XINHUA] .......................................................................... 32

AGRICULTURE

Exports of Cereals, Oils in Sep [CEI Database] .............................................................................. 32Sep Textile, Cereals, Oils Import Figures [CEI Database] .............................................................. 33Agencies Step Up Efforts To Buy Cotton [CHINA DAILY 26 Oct] ................................................ 33New Seed Fertilizing Increases Harvests [XINHUA] ....................................................................... 34Flooding Initiates More Water Control Projects [XINHUA] .......................................................... 34Protein-Enriched Flour Hits M arket [XINH UA] ............................................................................... 35Nei Monggol Sets New Records in Animal Husbandry [NONGMINRIBAO 13 Aug] ................... 35

JPRS-CAR-91-0614 November 1991 2

Guangxi Cotton Shortages Threaten Spinning Industry [NONGMIN RIBAO 15Au] .......Ag ........... 35

Ningxia Enjoys Good Summer Grain Harvest [NINGXIA RIBAO 21 Aug] .................................. 36

SOCIAL

Non-Marxist Approach To Root Cause of Crime [SHEHUI No 78] ....................................................... 37

PRC MEDIA ON TAIWAN AFFAIRS

Businessmen Speed Up Investment in Hong Kong [Hong Kong CHING-CHI TAO-PAO No 37] ............ 40

TAIWAN

Economy Reportedly Performing Even Better [CNA] .............................................................................. 43Economy Shows Signs of Strengthening [CNA] ......................................................................................... 43Unemployment Rate Hits Record Low 1.38 Percent [CNA] .................................................................... 44Exports Expected To Increase [CNA] ......................................................................................................... 44Provincial Government To Open Bank in Europe [CNA] ....................................................................... 44Dual Nationals Banned From Elected Posts [CNA] .................................................................................. 44

JPRS-CAR-91-0614 November 1991 INTERNATIONAL

UNITED STATES early, it demanded that the White House negotiate withVietnam. After the White House's August "submission,"

Article Views Cambodian Policy a group of congressional leaders then demanded thatBush cancel the 15-year-old trade embargo against

91CMO513A Beijing SHIJIE ZHISHI [WORLD Vietnam. The Bush administration has repeatedly givenAFFAIRS] in Chinese No 1082, 1 Jul 91 pp 15-16 in. In February of this year, the U.S. Treasury Depart-

ment authorized U.S. banks to establish communication[Article by Wen Shih (2429 4258): "The White House's links with Vietnamese banks in preparation for restoringDifficult Position With Respect to Its Cambodian trade between the two countries. In April, the StatePolicy"] Department proposed four stages for normalizing rela-

[Text] For the past several years, the United States has, tions with Vietnam and set up a U.S. office in Hanoi.based on changes in the situation, been continually Despite all this, Congress still believes the White Housereadjusting its policy on the Cambodian issue. In July is dragging its feet on improving relations with Vietnam.1990, after it announced it was cancelling recognition ofthe Coalition Government of Democratic Kampuchea Third, whether or not to support revision of the UN[CGDK], an intense controversy erupted between Con- peace plan. In August 1990, the five permanent membersgress and the White House. On several crucial questions, of the Security Council reached a framework agreementthe former has pressed steadily forward, constantly on an overall political settlement of the Cambodianexerting pressure, while the latter has kept giving in, issue, bringing hope of peace to the war-ravaged country.gradually going on the defensive. The White House's The Phnom Penh regime and Vietnam also expressedCambodian policy is now in difficult straits. support for the agreement. However, they also

demanded that it be revised by adding a clause toFocus of the Debate prevent the Khmer Rouge from staging a comeback.

The Bush administration's differences with the Demo- Certain members of Congress enthusiastically agreedcratic dominated Congress on the Cambodian issue with this argument. At the beginning of May, followingfocus on three aspects. his visit to Phnom Penh, Senator John Kerry criticized

the UN peace plan for being vague and ambiguous as toFirst, whether or not aid should continue to be supplied how to disarm the various sides engaged in hostilities,to Cambodian noncommunist resistance forces. U.S. aid and he condemned the Khmer Rouge. He urged that theto the Sihanouk and Son factions is divided between plan be revised.covert and overt. Following Vietnam's "troop with-drawal" from Cambodia, the congressional opposition The three aspects discussed here indicate that the U.S.began to demand cutbacks in and even elimination of aid administration, under continuously strong pressure fromto the Sihanouk and Son resistance forces to prevent the Congress, no longer considers Vietnam and the PhnomKhmer Rouge from "benefitting" from it. At the time, Penh regime as the main targets to be contained. Rather,congressional demands were deflected by the Bush as one of the chief objectives of its Cambodian policy, itadministration's rationale that aid to the noncommunist regards preventing the return to power of the Khmerresistance was useful in controlling the Khmer Rouge. Rouge, the main force opposing Vietnam, as its mainHowever, in October 1990, Congress stopped secret aid target. This makes clear that the U.S. stand on con-to the noncommunist resistance forces and later, going a taining Vietnam has already softened.step further, it attached to the foreign aid bill for fiscalyear 1991 harsh provisions for providing aid to the Reasons for the Predicamentforces. If they, either "strategically or tactically,"engaged in military cooperation with the Khmer Rouge, The Bush administration has irreconcilable differencesthe United States would discontinue all overt aid. Early with Congress, and the reason it has become boggedthis year, under pressure from Congress, the Bush down in a passive position on its Cambodian policy isadministration temporarily ceased overt aid to the Sih- many-sided.anouk and Son factions. Only because of famine thatoccurred in the region controlled by the two factions and First, huge changes in the world situation have producedbecause of Vietnam's continued support of the Phnom stohg a nges in the wold tuato havpoducedPenh government's military operations and reintensifi- strong assaults on U.S. policy toward Cambodia. Duringcation of the Cambodian civil war did the U.S. State the time of U.S.-Soviet confrontation, the United Statescartionoftein April announce it intended to unfreeze had no choice but to give tacit consent to and utilize theDepartment in Aprian it important actions of the Khmer Rouge in contending$7 million in humanitarian aid. with Vietnamese expansion. With the advent of the

Second, whether or not relations with Vietnam should be U.S.-Soviet detente and the end of the cold war, thenormalized. After Vietnam invaded Cambodia, the United States has gradually pushed "human rights"White House and Congress made Vietnam's cooperation diplomacy to center stage in international relations. Inwith the United States in the overall settlement of the addition, with Vietnam's "troop withdrawal" from Cam-Cambodian conflict a precondition for normalizing bodia, the United States no longer feels that the majorU.S.-Vietnamese relations. However, since 1990, Con- threat to Cambodia is Vietnam and the Phnom Penhgress' attitude has undergone a gradual change. Quite regime but that it comes from the Khmer Rouge whose

JPRS-CAR-91-0612 INTERNATIONAL 4 November 1991

"human rights" record is "extremely lacking." Conse- interests will be damaged. Because of the constantlyquently, under constant strong pressure from the U.S. increasing urgings of businessmen, certain members ofmedia and Congress, it is hard for the Bush administra- the U.S. Congress are demanding that the administra-tion to act otherwise. tion effect normal relations with Vietnam as quickly as

Second, the objectives of the Bush administration policy possible.

on Cambodia are self-contradictory. Since last year, Influences on the Cambodian Situationalthough the Bush administration has constantly exerted Although Vietnam declares it has now completely with-pressure on Vietnam and the Phnom Penh regime, it has, drawn its troops from Cambodia, it still has, in fact, aat the same time, been stressing the Khmer Rouge threat, fair number of troops hanging on there to maintain theFor this reason, it has even gone so far as to rescind its Phnom Penh regime. Disregarding this point is obvi-recognition of the [CGDK]. This injects complicating ously not beneficial to settling the Cambodian issue.factors into the settlement of the Cambodian issue in With the Phnom Penh regime actually still receivingaccordance with the UN framework agreement. support from disguised Vietnamese troops, the United

Third, under the pretext that the Khmer Rouge is States at present is not only not expanding aid to themobilizing a military-political force, the U.S. Congress is resistance forces of the Sihanouk and Son factions, but itproposing to resolutely exclude it. The Khmer Rouge has is instead blocking this type of aid. This is going tocaptured the highly strategic and economically impor- increase the differences in strength between the resis-tant city of Pailin, along with certain other regions, and tance and Phnom Penh. It will, on the whole, weaken therepulsed several counterattacks by Phnom Penh troops. resistance forces and, objectively, benefit the PhnomAs of now, they are firmly entrenched in Pailin. U.S. Penh regime.media are extremely uneasy about this and have declared We also should realize that, during the many years of thethat, after Vietnam's troop withdrawal, it would be resistance struggle, the three factions making up thedifficult for the Heng Samrin regime to contend with the Cambodian resistance forces have jointly opposed theKhmer Rouge. enemy and fought shoulder to shoulder. Their solidarity

Consequently, certain U.S. members of Congress are is exceedingly important to guaranteeing that Cambodiademanding that the UN peace plan be revised to prevent will become independent, peaceful, neutral, and non-the Khmer Rouge from resuming powerv aligned. The U.S. Congress wants to pressure the Siha-nouk and Son factions to draw a clear line of distinction

Finally, U.S. businessmen are worried that their compet- between themselves and the Khmer Rouge, therebyitors will get to the Vietnamese market ahead of them. sowing discord within the resistance forces. This isThey are, as a result, exerting greater and greater influ- harmful to a political settlement of the Cambodian issue.ence on Congress, demanding that relations with In addition, the actions of the U.S. Congress have alsoVietnam be improved as quickly as possible. Recently, encouraged the arrogance of the Heng Samrin regimeeconomic reforms in Vietnam have achieved initial and delayed implementation of the UN peace plan. Atsuccess, and the country has gone from importing rice to the Jakarta conference in early June, the Phnom Penhexporting it. Vietnamese policies to attract foreign cap- regime persisted in demanding that the Khmer Rouge beital are also far superior to those of East European brought to trial for "crimes" during the period it was incountries. As a result, some countries, which in the past power and that measures be taken to prevent it fromhave supported the U.S. embargo of Vietnam, have taking part in elections. Obviously, this approach by thebegun to resume trade relations with Vietnam. In Phnom Penh regime is a pretext for continuing to pursueOctober 1990, Japan even permitted their banks to the civil war with Vietnamese support.operate in Vietnam, marking the first time since the1975 unification of North and South Vietnam that a It could be said that the bias and shortsightedness of theWestern [as published] country has set foot in the U.S. Congress has now negatively influenced an overallVietnamese financial world. The U.S. Chamber of Com- just settlement of the Cambodian issue. Whether themerce is extremely concerned about this, complaining Bush administration can extract itself from the currentthat, when other countries expand their trade relations predicament is crucial to what the United States canwith Vietnam and invest money there, U.S. businesses accomplish with respect to a political settlement of theare being left out. It believes U.S. long-term economic Cambodian issue.

JPRS-CAR-91-0614 November 1991 ECONOMIC 3

NATIONAL AFFAIRS, POLICY guarantee" enterprises is that such guarantee for condi-tions outside is a strong support to their production

Progress, Problems of 'Double Guarantee' System management.

92CE0019A Beijing ZHONGGUO TONGJI XINXI 2. Strong sense of pride and responsibility generatedBAO in Chinese 15 Aug 91 pp 1, 2 among many cadres and workers in "double guarantee"

enterprises, enterprise management and production[Article by Yang Kuankuan (2799 1401 1401) Depart- improved. Many "double guarantee" enterprisesment of Industry and Transportation, State Statistical reported a feeling of pride and high responsibility amongBureau: "Performance of 'Double Guarantee' Enter- cadre and workers. Consequently, a sense of pride andprises After One Year"] urgency is in their thoughts, action, and work; this

feeling became a powerful spiritul force. The follow up[Text] Since last April the State Council has imple- observation indicates an overall trend over the yearmented in 234 of the nation's large and medium-sized among the 234 "double guarantee" enterprises of steadybackbone enterprises the "double guarantee" policy on a production and increased sales, reversing losses to profit,trial basis. The state guarantees enterprises major out- and improved economic efficiency. Gross value ofside conditions required for production, and enterprises industrial output increased 3 percent over 1989, andguarantee the state mandatory allocated products and during the first six months of 1991, it increased 4.6profits tax. Our follow-up investigation over a year percent over the same period last year. Sales income inindicates that there is a big difference between "guaran- 1990 increased 9.1 percent over 1989; in the first sixteed" and not guaranteed. The state indeed helped months of 1991, it increased 16.2 percent over the sameindividual enterprises solve some practical problems and period last year. Profits in 1990 declined 41.9 percentachieved positive results. On the other hand, we discov- from 1989; during the first six months of 1991, profitsered that they could only solve the pressing needs of an increased 1 percent over the same period in 1990, aenterprise, and the fundamental solution is to invigorate sharp contrast to large scale profit decline in otherenterprises by continuing reform. industries.

3. Output of state mandatory products, allocation andResults of "Double Guarantee" profits tax were assured. In 1990 and the first six monthsSince the experiment of "double guarantee" all depart- this year, the production of 60 percent of mandatoryments and enterprises involved have implemented the planned products exceeded the unified production plan,State Council's "double guarantee" spirit in earnest. 30 percent of all products has been either fulfilled orThey have done a lot of substantial work and achieved nearly fulfilled, and about 72 percent of the productsgood results. either fullfiled or exceeded the amount contracted by the

state. In comparison with the pre-"double guarantee"The positive results of "double guarantee" are demon- era, the production of other items has also beenstrated mostly in the following areas: improved. The major reason is the lack of buying power1. Increased sense of security in "double guarantee" on the part of customers. The profits tax turnover rateenterprises, outside conditions guaranteed. Since the was only 29.3 percent in the first six months last year; inremoval of the State Economic Commission during the the first six months this year, the profits tax turnover1988 system reform, production management became rate was 40.3 percent. Although this figure did not reachchaotic, which produced a wide-spread sense of loss of the goal of exceeding half for the year, it is an 11 percentdirection and the fear of inability to adapt in large and increase over last year's figure.medium enterprises that depended on the state for rawmaterial supplies and marketing. It is like "experiencing Limitations of "Double Guarantee"the loss of one's mother-in-law only after she is gone." Although "double guarantee" work played some role inAfter implementation of the "double guarantee" policy, developing industry and national economy as well as inthe State Council's Production Commission showed maintaining financial stability, its role is rather limitedimmediate concern for production management in based on the situation of "double guarantee" over a year,"double guarantee" enterprises, and helped them solve and onetheostratin o followguar eas:problems. "Double guarantee" enterprises all experi- and are demonstrated in the following areas:enced the feeling of "a baby without milk who found a 1.Production links are the target of "double guarantee," amother." According to statistics, between June 1990 and temporary solution that does not solve deep problems.June 1991, supplies of 20 major raw materials guaran- Whether it is a guarantee of raw material supplies,teed by the state greatly increased compared with the capital investment, or transportation, they all concernpre-"double guarantee" era, 80 percent of products enterprise production activities. Consequently, it is ateither basically fulfilled or exceeded supply plans. The best a temporary solution in emergency productiontransportation volume fulfilled about 107 percent of the crises. It has no effect on the major problems thatplan, 10 percent more than the volume in pre-"double prevent enterprises from development. Some of theguarantee" period. Banks established circulating funds major problems, such as poor market due to unbalancedworth 13.8 billion yuan exclusively for "double guaran- supply and demand, surplus production capacity due totee" enterprises. The overall response from the "double unchecked technology imports, market chaos due to the

JPRS-CAR-91-0614 ECONOMIC 4 November 1991

"double price" system, and unchecked and duplicating enterprises can be balanced, and thereby develop andconstruction due to diversified investment system and perfect the socialist commodity market, and enterprisesseparate financing can not be solved permanently. of different size and ownership will have the same2. Limitations of "double guarantee" itself. The state can competitive edge.only guarantee the supply of 20 major raw materials to 2. Socialist planned commodity markets must strictlyenterprises. On the other hand, there are hundreds and adhere to plans. Currently in our country planning isthousands of raw materials needed for production. In seriously out of touch with reality. For instance, invest-fact, enterprise production will be interrupted if one of ment planning proposes volume but fails to take intothese materials is missing. Therefore, although the guar- consideration the source of investment capital; diversi-antee of the supply of these 20 raw materials has an fled investment creates blind and repeatitive construc-impact on production, its effect is rather limited. Fur- tion; unbalanced production planning in pursuit ofthermore, large- and medium-size "double guarantee" volume and speed often result in low effiency; lack ofenterprises have many relationships with other enter- serious attitude in purchasing plan and in contractsprises. If the production of these enterprises cannot be results in overstock and payment delay; improper importguaranteed, it will have a serious impact on large enter- and export planning creates excessive imports and self-prises, especially in the processing industry. In this sense destructive export competition. The only way that wethe role of "double guarantee" has limitations. Finally, can stop this chaos, and build a real socialist plannedensuring the quantity, quality, and variety of 20 major commodity economic order is to take planning seriously.raw materials, cannot fulfill all enterprise needs. 3. Industrial production must be managed in line with3. Lack of binding force. Since implementation of appropriate trades, and must break the boundary of"double guarantee," there have been cases where the ministries and departments.state was unable to guarantee the supply of raw mate- 4. Clearing "triangle debts" is an important way torials, and enterprises were unable to fulfill contracts andplanned profits tax. For instance, in 1990 the state was rnate d ustrial ecomy incte n erifut i-able to supply only 70-90 percent of the promised angle debts" have become increasingly serious inamount in five of the 20 guaranteed raw materials. The "double guarantee enterprises. During the first sixsuply f oe rw mteral aseve les tan 0 prcet, months this year, debts owed to "double guarantee"supply of one raw material was even less than 70 percent. enterprises totaled 64.85 billion yuan, an increase of 11On the part of enterprises, less than 40 enterprises were billion yuan over the beginning of the year. Meanwhile,able to guarantee all products. Other enterprises were "double guarantee" enterprises owe 57.58 billion yuanshort to different degrees. The majority of products did in debts, an increase of 11.3 billion yuan over thenot fulfill contracts. Only 134 enterprises succeeded in ni ofbthe yea s o blem has oventefulfilling or nearly fulfilling their contracts with the state, begining of the year. This problem has put enterprisesand 69 enterprises did not fulfill planned profits tax. under acute pressure. The State Council has startedHowever, because the reasons for not fulfilling the experiments in Liaoning Province and suggests that the"double guarantee" plan are complicated and the lack of lessons learned in pilot projects should be spread to therules and regulations in defining responsibilities and whole nation as soon as possible.solutions, neither the state nor enterprises are able to 5. Reduce enterprise burdens.take appropriate responsibilities. Besides, the state did 6. Use the "leverage of tax bracket" wisely. According tonot take measures to reward enterprises for fulfilling the some "leverantax et"rwises, incrding to"Double Guarantee." There is a lack of incentives; and some "double guarantee" enterprises, increased sales tax

"on many popular items during the 1988 industrialthere is no difference in how well an enterprise does. adjustment and growth was justified at the time becauseof higher prices. However, since the market slump, poor

Solution Lays in Continuing Reform sales, and lower prices, it is obviously unreasonable toTo turn large- and medium-sized state enterprises into maintain the same high sales tax braket under theeconomic entities that are responsible for their own circumstances. I suggest that the state use the "leverageindependent management, their own profit and loss, of tax bracket" based on the market situation, andtheir own self-generated reform and development, one increase or decrease taxes accordingly. Only by doing somust integrate "double guarantee" policy with deep level can we follow the laws of economic development.reform and put the emphasis on the latter.

"Double guarantee" can be improved in two areas. One Increase Economic Efficiency, Continue Reformarea is to clearly lay out the "double guarantee" plan. 91CEO763A Beijing JINGJI LILUN YU JINGJIThe second area is to establish a system of rewards and GUANLI [ECONOMIC THEORY AND BUSINESSpunishment, and give incentives to enterprises. MANAGEMENT] in Chinese No 4, 28 Jul 91 pp 8-13

Continuing reform will solve deep level issues that the [Article by Tang Fengyi (0781 0023 5030), research"double guarantee" failed to solve. The following are fellow at the Chinese Academy of Social Sciences'suggestions: Finance, Commerce and Commodities Institute; edited1. Implement price reform step by step according to by Wang Bifeng (3769 4310 1496): "Raising Economicplan, so that the input and output of production in Efficiency and Deepening Enterprise Reform"]

JPRS-CAR-91-0614 November 1991 ECONOMIC 5

[Text] As our decline in economic efficiency and the lack Excluding such high profitmaking enterprises, theof vitality of most of our enterprises have now become decrease in the realized profits of ordinary enterprises isthe crux of our economic development, making a con- even more alarming.scientious analysis of our current economic efficiency,and linking it to our enterprise reform direction, have A certain amount of hypocrisy is also lurking behind thebecome extremely vital immediate tasks. Our analysis official statistics. Some enterprises acknowledge that ahere will be aimed only at certain key issues, rigorous accounting would show that certain profit-

making enterprises are actually "profitable in name, butI. Our Basic Trend of Yearly Decreasing Realized losing propositions in reality." Such sham profitmakingProfits and Taxes is caused by at least the following factors: (1) ManyWhen people speak of economic efficiency at present, enterprises often intentionally shift to the next year coststhe general indicators that they use most are realized and expenses that should be reported by the fourthprofit and tax amounts (margins). Our realized profits quarter, or at least submitted before the end of the year,and taxes certainly decreased very sharply in 1990, with in order to maintain or "increase" their realized profits;statistics showing that they decreased 18.5 percent, (2) Very low rates of depreciation, plus too little deduc-including a 3.4 percent drop in profits and taxes paid to tion and retention of depreciation charges, has created athe state, of which 55.3 percent was a drop in profits paid severe shortage of compensation for loss of fixed assets.to the state. Our decrease in realized profits alone was Such "living off of past gains" is quite prevalent (witheven more severe in 1990, in that the realized profits of statistics showing assets losses due to inadequate com-budgeted industrial enterprises throughout China pensation being about 70 billion yuan a year in recentdropped 58 percent, and those of commercial ones years). (3) The commonly used method of linking pay-dropped 78 percent. Even in our light industrial system rolls to economic efficiency in the contract managementthat has always had higher profit margins, profits and responsibility system, means that the amount of profitstaxes still decreased 21.7 percent in 1990, with losses that are realized in a particular year has a direct impactincreasing almost 12 percent in number and 1.8 times in on the income of staff members and workers in that year.amount as compared to those of 1989. This shows that Driven by the profit motive, some enterprises oftenour decrease in realized profits and taxes has become inflate their actual profits. Due to these factors, thequite severe, statistical data on profits of some enterprises shouldactually be discounted.But this is still not the whole of the problem,

as a deeper

analysis shows that conditions are even more grim. As Moreover, even state statistical data shows that realenterprise development is uneven, the overall figures profit margins are in a protracted decreasing trend.conceal the reality that the high profits earned by a few Statistics show that the sales-profit margins of budgetedoutstanding enterprises are "cooking the books" as far as industrial enterprises throughout China have beenthe losses sustained by most enterprises are concerned, decreasing year after year as follows:

Table 1Year 1983 1985 1988 1989 1990Percent 14.83 12.56 8.88 6.35 2.6

The fund-profit/tax margins of China's industrial enter- realized profits and taxes are determined by many fac-prises decreased from 24.02 percent in 1985 to 19.95 tors. It is not simply a matter of input-output ratio per se,percent in 1987 and 16.79 percent in 1989. Moreover but rather that enterprise input-output efficiency is alsotheir fixed costs rose steadily at a rate of more than 6 determined by many internal and external enterprisepercent a year during the five years from 1985 to 1990, factors. I think that while China's current economicreaching 22.4 percent in 1989 and 37 percent in 1990. efficiency problem has been emphasized, it has beenThis shows that poor and steadily decreasing economic overemphasized, which has created a certain amount ofefficiency is not the distinctive feature of any particular confusion, so that at least the following matters need toyear, but rather a long-standing decreasing trend. As it be analyzed:would have been impossible for certain chance factorsalone to have created such a situation, it has become 1. The Idea (Concept) of Economic Efficiencynecessary to dig in and find the deeper ones. The idea of economic efficiency grew out of the notion of

economic results. The earliest mention of these so-calledII. The Key Limiting Factors Involved in and the Crux economic results was by David Legault, a leading Britishof Our Poor Economic Efficiency exponent of classical political science and economics,

who called them "creating as much material wealth asWhile realized profit and tax amounts (margins) are possible in the least amount of work time." Economiccertainly key indicators of economic efficiency, they are results are now generally held to be the relations (orstill not the whole substantive crux of our economic comparison) between the labor that is expended or usedefficiency problem. The problem is that the amounts of and the labor successes that are achieved in production

JPRS-CAR-91-0616 ECONOMIC 4 November 1991

operations. The idea of economic efficiency, in compar- practice. This shows that when striving for the principleison to that of economic results, in addition to including of socialist economic efficiency, enhancing our corn-the basic provision of the relations between expenditure modity economy mentality remains a key issue that mustand income, has at least the following two added impli- not be overlooked;cations: (1) Production achievements (products) aresuited to social needs. That is, economic efficiency 2. The Key Limiting Factors in Our Economicincludes product quality and marketability, and empha- Efficiencysizes creation of value over simple achievement of mate- Economic efficiency's manifestations or evaluation cri-rial results. (2) Economic efficiency emphasizes the fixed teria are different from its limiting factors. While variousand overall nature of social achievements. As value is manifestations based on varying needs can be used toeasier to sum up and compare, and reflects overall social analyze economic efficiency, all of which are aimed atachievements, economic efficiency is a more fully devel- understanding the facts about economic efficiencyoped idea. From this perspective, economic efficiency during a given period of time, the various factors thatnot only breaks free from the limitations of individual affect economic efficiency, i.e., the direct or indirectproducers, but also logically includes a lot of the factors related factors that cause it to be good or poor, of whichthat affect the attainment of social production achieve- some are chance factors and others are key limitingments. factors, must be understood in order for it to be raised.

The key limiting factors in China's economic efficiencyBut the issue does not lie in the idea itself (as the at present are as follows: (1) enterprise management anddefinition of an idea can be gradually clarified and administration; (2) enterprise or industrial economy ofstandardized through deliberation). These implications scale; (3) the rationality of various economic structuresof the idea of economic efficiency were clarified in order focused on the distribution of existing assets; (4) the roleto illustrate the theoretical issues involved in the preva- of assets proliferation in adjusting and regulating thelent ideas about economic efficiency. The following existing assets structure. As these factors are an organic"definitions" of the more prevalent current ideas about whole, they cannot be dealt with in isolation from eachefficiency cannot be ignored: (1) Efficiency emphasizes other.income (output) over expenditure (input). Our produc- As far as the current poor efficiency of state-ownedtion growth and profit and tax income are often derived enterprises is concerned, while the government prefers tofrom out-of-proportion increased input. (2) Efficiency blame it on internal enterprise management, enterprisesemphasizes microeconomic operations over macroeco- prefer to blame it on the policy climate and othernomic ones. Economic efficiency seems to refer only to external factors instead. While the preferences of eachenterprise problems per se. (3) Efficiency emphasizes side are obviously one-sided, yet seemingly well-payments to the state and appearances over real achieve- side a onvious ane-sis seemin ell-menits. (4) Efficiency emphasizes immediate interests grounded, a conscientious analysis shows that neitherovents. (4)nEffiieonesy emphazess immpoatae intoores are completely rational for the following reasons: (1)over long-range ones, by giving less importance to com- System defects are certainly exacerbating basic enter-pensation for and replacement and proliferation of state Syst eme nt arefcuties. Facerstinghbas eavyassets. Such long-finalized ideas about economic effi- prise management difficulties. Factors, such as heavyciencyares. inthe lfinalie aalysis, nonommity economyc eand inescapable burdens, equalitarian distribution ten-ciency are, in the final analysis, noncommodity economy dencies, irrational product price controls, and a lack ofideas that are contrary to the original meaning of eco- motivation and financial resources to upgrade tech-nomic efficiency. Due to its economic properties per se, motivato a nd ina resouces to u ade tec-a natural economy does not emphasize economic effi- nology, are all presenting great obstacles to basic man-ciency, as can be seen from the following examples: (1) agemnent improvements. Poor management due to sub-As a natural economy is aimed at satisfying its own jective factors is actually rare and not difficult to resolve.consumer needs instead of producing commodities for (2) Due to the longstanding existence of irrational eco-consmeir value, instemasie o eriproduction alone, has nomic structures, even when strong enterprises improvetheir value, it emphasizes material productin alon(2 as their internal management, it has no effect and worsensno idea of cost, and does not consider input. (2) As a economic efficiency instead. (3) While the basic prereq-natural economy is characterized by manual labor and uisites for improved enterprise management are tougherseparatism, it does not emphasize division of labor, does pro ved less admintrare ternot consider value, and has no social regulatory func- property limitations and less administrative interfer-ntions.der (3)uAs and ntal enom soisl aieduator theups- ence, such things are now basic impossibilities. As statedtions. (3) As a natural economy is aimed at the posses- above, this is causing an increasing decline in enterprisesion of wealth per se, it emphasizes such possession and microeconomic efficiency. As long as the emphasis is putappearances over operations and proliferation. It would on improving management and upgrading technologybury material wealth in the form of gold, silver, money, within enterprises in isolation,s at present, the problemand valuables under the ground and let it rot before using is going to remain unchanged.it to "produce more wealth," of which there are manyexamples. While such actions are absolutely inimicable Economy of scale involves the following two issues: (1)to the idea of efficiency in a commodity economy, Whether enterprise mass production scope can meet thecertain aspects of our ideas about economic efficiency demands of economy of scale. (2) Whether the organiza-often contain various degrees of similar deviations. tional alliances of similar or interrelated enterprises canUsing such noncommodity economy efficiency to conform to the objective needs of economy of scale.observe and raise economic efficiency is a harmful While the first issue determines enterprise management

JPRS-CAR-91-0614 November 1991 ECONOMIC 7

quality and competitive capability, it also requires the 3. The Crux of Our Decreasing Economic Efficiencyestablishment of genuine merger and elimination-through-competition forces. And while the second issue While this analysis of the key limiting factors in ourinvolves enterprise organizational structure, as it is basi- economic efficiency is obviously deeper than a superfi-cally a matter of the reorganization and mobility of key cial treatment of the problem, I still feel that it has notproduction factors caused by production growth needs, it gone deep enough, since the following questions remainfalls into the category of structural optimization. Neither to be answered: Why have these limiting factorsof these issues can be resolved simply through microeco- remained unimproved for so long? And can these keynomic action. The ineffectiveness and unevenness of our issues be dealt with in isolation? The facts show thatdisposition of resources is one of the key sources of our these issues do not involve partial factors, nor can theypoor socioeconomic efficiency. be resolved with stopgap measures, but rather that it will

be necessary to search for their ultimate source or crux.As to adjusting existing assets and regulating assets I think that it ultimately boils down to the fact that weproliferation, enterprises and society can act according will have to change our state-owned assets operatingto the law of value, be guided by macroeconomic regu- concepts and property rights system. In short, our state-lation and control, and use key production factor mar- owned assets concepts will have to be changed from thekets, property rights transfers, and enterprise mergers to material management form of a natural or semi-naturalachieve a smooth disposition of resources and optimiza- economy to commodity and value management, withtion of structures when market forces are sound and our management objectives being operating qualitycomplete. But as the state (government) is now the major (results and efficiency) and assets proliferation, whichinvestor, carries out existing assets adjustments through will require a series of management system and patternadministrative force from above, and has concurrent changes. The most crucial and fundamental of theseadministrative, social, macroeconomic regulation and reforms will be property rights reform, to ensure that thecontrol, and ownership functions, public welfare and entities that actually manage assets have the functionsadministrative policymaking are its major objectives, and mentalities of the holders of property rights, so thatinstead of self-interest and efficient decisionmaking like we can finally move from commercialization of productsenterprises, which are economic entities. In addition, the to commercialization of assets and property rights, makedual-track operations of administrative versus economic our enterprises market-oriented, and enable them toand command economy vs market economy are bound become genuine commodity producers and managers. Into have various detrimental effects on economic effi- order to accomplish this, we will have to ensure that ourciency, which are expressed as existing assets adjust- public ownership is not encroached on, while building ament, assets proliferation regulation, and extremely poor dual-ownership structure (of natural and corporate prop-economic efficiency. For instance, statistics show that erty rights), and gradually evolving effective economicthe 2-trillion-yuan that was invested in the four decades operating forces. The government's special role in thissince the founding of the PRC (up to the end of 1988) has will be to use various levers and means of effectiveeffectively evolved into only 700 billion yuan worth of macroeconomic regulation and control, in order to grad-assets, so that about 1.3 trillion yuan, and 1 trillion yuan ually resolve the various issues involved in oureven according to the most conservative estimate, of decreasing economic efficiency, and ensure the steadywhich about 300 billion yuan was lost due to policy- and sustained development of our national economy.making errors and 202.4 billion yuan was lost due toforced production stoppages, has been ineffective or III. New Beginnings and Approaches for Furtheringbasically ineffective (wasted) investment. As to the oper- Enterprise Reformation and adjustment of existing assets, there are evenmore problems, such as assets erosion and devaluation, Just as the Seventh Plenary Session of the 13th CPCequipment obsolescence and aging without adequate Central Committee has reaffirmed, the key link in coun-compensation, assets left unused, and extremely poor tering the abovementioned problems remains reform ofoperating efficiency, all of which have worsened our state-owned enterprises, large- and medium-sized oneseconomic efficiency. in particular. Moreover, the ultimate aim of enterprise

reform remains the separation of government adminis-In short, overall economic efficiency cannot be assessed tration from enterprise management, in order to enablefrom the viewpoint of whether profits and taxes are enterprises to become commodity producers and man-increasing or decreasing alone, but should also be judged agers who have management decisionmaking power andaccording to the waste created in these areas, and the key the sole responsibility for their profits or losses. As ourlimiting role that this waste has played in lowering our direction has been thus clearly indicated, the problemeconomic efficiency. From an overall perspective, not remains how to realize this aim genuinely and gradually,only is our economic efficiency situation quite grim, but by making the transition from our old system to a newmacroeconomic and deeper problems are even more one of a commodity economy. I will only make a fewsignificant and crucial factors in our poor economic suggestions here on the following key aspects of thisefficiency than are microeconomic ones. transition:

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1. Current New Beginnings in Enterprise Reform and workers. Even if they prefer to be "recuperated" inthe short term through training, they must not be

While our current reemphasis of the issues of raising allowed to waste resources or keep their outer structures.economic efficiency and enhancing enterprise vitality Such resolute elimination would also put pressure oncomes after about a dozen years of reform, as the other enterprises. The two types of enterprises in theproblems that we are encountering today are actually intermediate category are the focus of reform and adjust-different than those of a dozen years ago, and the setting ment, and their problems should be resolved graduallyand characteristics are also different, we must come up and in turn. In short, results can be achieved only bywith new, higher-level approaches and reform ideas, i.e., suiting the remedy to the case.new beginnings. These new beginnings include at leastones in the following areas: C. We must make an issue of the word "deepening" in

our future reform. In our dozen years of reform, we haveA. As our state-owned enterprises, particularly large- and roughly undergone the three stages of devolvingmedium-sized ones, are now facing a huge competitive authority and conceding profits to lower administrativechallenge from small enterprises, nonstate-owned ones levels, substituting taxes for profits, and implementingin particular, which challenge certainly did not exist a the contract management responsibility system. Whiledozen years ago, their competitiveness and market share we have achieved certain successes despite the manyare going to drop sharply, and their dominant role in our complications along the way, we have certainly not yetnational economy is certainly going to be weakened satisfactorily resolved the deep conflicts between our oldseverely, unless they are basically extricated from their system and the demands of a commodity economy. Aspredicament. This is a major issue that will have an taking certain ordinary stopgap measures under suchimpact on the consolidation and further development of conditions might allieviate certain frictions but couldour socialist economy. not make substantive advances, we must guard against

making issues of superficial matters, and focus ourB. A dozen years of reform rectification and adjustment efforts on a genuine "deepening" of reform instead. Thehas clarified our enterprise proficiency and conditions, crux of realizing our development objectives for the lastwhich would have been impossible a decade ago. When decade of the 20th century seems to be making anotherreform first began, our state-owned enterprises were not good enterprise reform move, achieving certain break-in such bad shape, and their development potential and throughs, and continuing to advance. Our current eco-capability of adapting to a commodity economy were not nomic stability is presenting us with a good opportunityyet very clear. While the methods of "across-the-board to deepen reform without much risk, as long as weapplication" and "quick march" still seemed generally prepare fully, take safe steps, and reach a commonfeasible then, a dozen years of reform and the trials of understanding with our people.market competition (even though they were certainly notcomplete) have widened the gaps among enterprises, and 2. Assets Contracting by Corporate Agencies Will Bebrought about enormous changes. As those that were the Way To Improve Our Contract Managementgenuinely invigorated, and those that have absolutely no Responsibility System.development prospects, are both generally in the While improving our widely practiced contract manage-minority (with statistics on large- and medium-sized ment responsibility system would obviously be a suc-enterprises in Beijing showing about 10 percent in the cessful way to accomplish our objectives, because itfirst category and less than 20 percent in the second), the would not necessarily be desirable or even feasible tomajority of enterprises are in an intermediate category of simply replace it with another system, a major issue thatgenerally having very inadequate vitality. This majority simplysreplae studied anolved is a to issue tof enterprises in the intermediate category can also be remains to be studied and resolved is how to improve itofuntherpbroken down t intormediathefoli categoricanls: b so that it will contribute to our ultimate enterprisefurther broken down into the following two categories: reform objectives.(1) those that have development prospects and vitalityand, provided they are granted the proper conditions While it is an objective fact that Capital Steel has been(mainly decisionmaking power), can flourish; (2) those successfully invigorated through the use of contracting, itthat need major adjustments of their economic structure is another that contracting has certainly not displayedand product mix, and defined enterprise and product such might on a broader scale. So how is the difference todevelopment directions and, once they have completed be accounted for? I think that the most crucial differencethese adjustments, should be given the proper support in Capital Steel's experience is that its contracting isand a free rein to develop. These four types of enterprises different from ordinary contracting, which is efficiencymust be dealt with differently and guided in a classified target contracting. As far as contracted targets per se areway. Those that have been invigorated should be allowed concerned, efficiency target contracting has the followingto continue to develop and self-adjust according to two major defects: (1) Its contracted targets are indi-market needs, as long as they continue to make slight vidual and its rights do not correspond to its duties.improvements. Those few that have lost their vitality, Enterprise actions are bound to be slanted towards thehave no real development prospects, or are heavily in several contracted targets, which cannot promote enter-debt and should have long since been allowed to go prise operational flexibility or management enhance-bankrupt, should be eliminated resolutely, and other ment. (2) Its contracted targets are too weakly tied toplans should be properly made for their staff members assets operational quality (results and efficiency), so that

JPRS-CAR-91-0614 November 1991 ECONOMIC 9

it is easy to sacrifice property interests to contracted enabled them to become a new type of fledgling corpo-target completion. This is also one of the sources of the rate agency that exercises the missions of assets manage-inability to stop the shortsighted actions and material ment and proliferation on behalf of the state. While theytendencies of enterprises despite repeated attempts. In still need to be improved, perfected, and granted legaladdition, efficiency target contracting has the defects of status, they have actually already become fledglingdifficult choices to be made and too much negotiating holders of corporate property rights who are playing aflexibility to varying degrees in areas, such as the setting key role in Capital Steel's assets contracting. This showsof contracted bases, the number of targets, and the length that correctly summing up and improving on Capitalof contracting. Whereas the success of Capital Steel's Steel's experience not only will indicate the way in whichcontracting is due precisely to its sort of unconscious to improve the contract management responsibilityassets contracting (which is not very clear to either party system, but also will provide a valuable lesson in dove-to the contracting), and even its including of assets tailing future reform objectives.proliferation contracting factors (with contracted agree-ments providing for equipment upgrading and replace- 3. While Perfecting the Contract Managementment, no state investment, and enterprise self- Responsibility System, We Should Gradually Create thedevelopment). Its major distinguishing features are as Conditions To Develop Shareholding Systemfollows: Experiments and Carry Out Property Rights System

Reforms.A. Capital Steel's contracted targets or contracted

con-

tracts are conspicuously programmed and comprehen- Even Capital Steel's perfected assets proliferation con-sive. Capital Steel has only one substantive directly tracting will still not be our enterprise reform goalcontracted target with the state, i.e., guaranteed progres- model. This is because this kind of assets proliferationsive tax and profit payments to the state (increasing at a contracting actually still retains certain remnants of therate of 7.2 percent a year). The state's conditions are: (1) old system which, if continued, will still produce newno further state investment, and (2) permission to sell 15 conflicts with the development of a commoditypercent of its products on its own. Thus, in order to economy. These are expressed mainly as follows: (1) Itmaintain and develop its existing enterprise profit struc- still prescribes an administrative contracting structure,ture, Capital Steel has to accomplish such things as in which government and enterprise responsibilitiesachieving a realized profit growth rate of 20 percent a have certainly not been truely separated. (2) It still has ayear, using most of its retained profits for reinvestment, single major owner. While that might be all right for areplacement of equipment, and enhancement and devel- few enterprises, a single major owner lacks objectiveopment of reserve strength, using internal contracting, judgment restraint forces as a general model, and stillguarantee, and examination methods, mobilizing all might regerminate the original defects of the old system.personnel to share in the risks, enhancing management, (3) Its property rights system is still imperfect and poorlyand developing markets. All of these are programmed suited to the operating forces of a commodity economy.targets for overall management and administrative moti- Thus, even though this reform can enhance enterprisevation, so that "once they are grasped, everything else vitality and alleviate the abovementioned factors in ourwill fall into place." declining economic efficiency, it still does not have the

tremendous force of a contemporary property rightsB. Capital Steel's contracting periods are 15 years. This system and thus, would be hard to use to put our wholenot only conforms to the heavy industrial enterprise national economy onto an orderly course of operation.characteristic of a long production-results cycle, but alsobrings extra long-range and steady enterprise growth, A model enterprise system that would be appropriate forstimulates enterprise motivation and restraint, and a contemporary property rights system would be a lim-amounts to pointed assets contracting. ited shareholding company system. As conducting share-

holding system experiments in qualified enterprisesC. Capital Steel's contracting basically excludes random would be very valuable in helping to develop experienceadministrative interference, changes its enterprise profit in trying to weld public ownership to shareholding, andexpectations from dependence on the state to reliance on would be a prototype for future public property rightsmarkets and its own efforts, and gives it greater and reform, a key way to increase enterprise reform remainsmore complete management decisionmaking power. to constantly advance and expand shareholding experi-

ments, and then to popularize them gradually. ThereD. Its most important and also most enlightening cre- would be no harm is saying that this path would be evenation is that its suiting of jobs to abilities, through its

installation of factory committees, its general director more positive, because it would not require goingresponsibility system led by factory committees, and its through the stage of the contract management responsi-breaking down of the boundaries between cadres and bility system.workers, has aroused a sense of responsibility of being But whether it is perfected contracting or expandedthe masters among its staff members and workers, and shareholding experiments that we are talking about, untilformed a common value mentality of being "Capital a scientific property rights system is established andSteel workers" and "Capital Steel people." It should be perfected throughout our society, it will remain impos-particularly emphasized here that the makeup and sible to basically resolve the problems involved in devel-planned duties of its factory committees have actually oping a socialist commodity economy and fully raising

JPRS-CAR-91-06110 ECONOMIC 4 November 1991

our economic efficiency. As without it our best case value of those commodities. This reduces the economicscenario could be only to achieve certain limited partial benefits accruing to large and medium size enterprises.or short-term objectives, property rights reform will be This problem is particularly severe with machinery andan unavoidable and irreplaceable step that we will have electronic products in Changde Municipality. Among 23to take sooner or later to increase enterprise reform, products in this category produced by the 13 machineregardless of which model is chosen through long-range building and electronics enterprises in the municipality,studies. Moreover, it will be only when we have resolved prices for seven of them (3.4 percent) are too low. Thegreat issues, such as proving the operating effectiveness state fixed the maximum floating price for number 207of a property rights system with the distinctive charac- bearings, which are manufactured by Changde Munic-teristics of the socialist public ownership that we have ipal Bearing Factory, at 2.8 yuan per set in 1984, whilealready evolved, raising our economic efficiency fully actual production costs plus sales tax per set in 1990and steadily, carrying out assets replacement and prolif- amounted to 6.17 yuan, which resulted in a loss of 3.37eration steadily, and creating more and better material yuan for every bearing set sold at the fixed price. Thewealth steadily, that we can achieve the ideal solution, annual production quota of 300,000 bearing sets meansbring the advantages of socialism into full play, and a loss of 1,011,000 yuan. After the implementation ofmake our people's lives happier and more satisfactory. state prices (including floating prices), some productsSuch a future would be desirable. have not even generated enough funds to offset the cost

Enterprises Face Pricing Problems of their raw materials. The state has set a maximumfloating price of 4510 yuan for the 3 W-1.6/10 air

91CEO759A Nanchang JIAGE YUEKAN [PRICING compressor, which is manufactured by the ChangdeMONTHLY] in Chinese No 7, 15 Jul 91 pp 23-24, 3 General Machinery Factory, but the steel, cast iron, and

[Article by Shen Zhaoxing (3088 0340 5281), Li Fujun electrical equipment that go into the machinery cost(2621 3637 6511), Yang Jinhai (2799 6855 3189), and 5210 yuan. For this reason, the more the product sells,Liu Degui (0491 1795 6311): "Price Obstacles Impeding the more money is lost. Enterprises are complaining thatEfforts To Revitalize Large- and Medium-Sized Enter- they have the capacity to produce goods for the stateprises; Solutions"] plan, but they cannot afford to sell them.

3. The supply of raw materials for the manufacture ofproducts within the state plan is not dependable. For

[Text] some time, there has been a shortage of the major rawIn the midst of the current market slump, there are materials needed for the manufacture of products man-several reasons why large and medium size enterprises dated by the state plan. There are several reasons for thislack vitality. Some factors are related to prices, situation. First, state allocations are insufficient. The

1. Authority to regulate prices is excessively centralized Changde Municipal Bearing Factory requires 1100 tonsfor some commodities. For example, of the 23 products of steel for the manufacture of products called for by themanufactured by 13 factories in the machine building state plan, but the state has only allocated 500 tons ofand electronics system in Changde Municipality (Hunan steel to the factory, less than half of what is required.Province), the price of 17 of them (74 percent) are Second, the state has failed to meet its own allocationregulated at the ministerial level. Prices for 5 (29.4 plans. The actual amount of steel allocated last year topercent) of the 17 products have not been readjusted the Changde Municipal Textile Machinery Factory wassince 1984. The state set a maximum floating price of 230 tons below the allocation target of 2274 tons. Third,3335 yuan in 1984 for the 28 ZLB-70 water pump, which allocated materials frequently fail to match specifica-is manufactured by Machinery Factory No. 71 in tions. Last year, 11.74 percent of the steel provided byChangde. Production costs at the time were 2360 yuan, the state to Changde Municipal Textile Machinery Fac-but they increased by a factor of 3.8 over the ensuing six tory did not match specifications.years, reaching 9000 yuan by 1989. The enterprise could 4. Prices for raw materials and energy resources haveclearly not afford to sell the product at the mandated risen too quickly. In recent years, prices for some rawprice. It was not until August 1990 that the Ministry of materials and energy resources within the state plan haveMachine Building and Electronics raised the price been readjusted many times. For example, the averagesharply, nearly quadrupling it from 3315 yuan to 13225 price for metals within the state plan have doubled sinceyuan. However, the actual market price of the product is 1984, and in the most extreme case has risen by 117around 9000 yuan, or only about 68 percent of the percent. The average price of coal produced within theadjusted price. This shows that when authority to regu- state plan by coal mines under the jurisdiction oflate prices is excessively centralized, prices are inevitably Changde Municipality has nearly doubled since 1984.readjusted too late or by to an inappropriate degree, and Sharply rising prices for raw materials and energythey become completely divorced from production costs resources have caused production cost for manufac-and the capacity of the market to support the price. This turing enterprises to skyrocket. Production costs for therestricts the development of enterprises. 20 ZLB-70 water pump, which is produced by2. Some commodity prices subject to state control are Machinery Factory No. 71, have risen by a factor of 3.6,too low. The formulation and readjustment of prices for from 1330 yuan in 1983 to 4770 yuan. Enterprises havesome commodities are completely divorced from the been unable to absorb these rapidly rising costs and have

JPRS-CAR-91-0614 November 1991 ECONOMIC 11

attempted to pass them on to the market, but the market study issues in depth, and do everything within theirhas been unable to sustain them, so enterprises have had authority to resolve serious price difficulties in a timelyto cut prices to get rid of their products. The result has manner. They must set themselves a goal of respondingbeen a clear decline in economic benefits. The textile within a week to all requests and reports from enter-industry is being squeezed on both sides by policy- prises, and when special circumstances arise, theirrelated price rises for raw materials and price rises for response must not take longer than two weeks. Theytextile products which have not yet been carried through must help enterprises set up healthy internal price sys-to completion. Last year, unprecedented losses totalling tems and become more adaptable to market economics20.46 billion yuan were suffered by 59.46 percent of the and the law of price. The work of cost research teamstextile enterprises in Changde Municipality. Of the 13 must expanded so that they can study and analyze thefactories in the municipality's machine building system, enterprise costs and provide useful price information inthe number suffering losses increased from one in 1989 a timely manner, thereby helping enterprises to restruc-to eight in 1990, and the total of these losses increased by ture, improve management, and strengthen their com-2.32 billion yuan. petitiveness. At the same time, they must abandon their

5. Production of some commodities has exceeded sales, one-sided work method of investigation and punish-

which has resulted in price cutting. Some sectors have ment. They must combine this aspect of their work with

developed blindly, and production has outpaced sales. service-oriented activities. They must also seriouslyInventory of textile products in Changde Municipality investigate the problem of exorbitant fees charged bylast year increased at an alarming pace. Inventories of government agencies, a problem about which enterprises

cut yarn increased 22.8 percent from the beginning of the have complained bitterly. They must gradually introduceyear to the end. Inventories of cotton cloth increased by the "double trust" activities into industrial enterprisesa factor of 3.1 over the previous year, and inventories of and strengthen the mechanism of self-restraint.printed and dyed cloth increased by a factor of 3.9 over 2. We must clarify the goal of price regulation andthe previous year, with 158 million yuan worth of decentralize price regulatory authority. In particular, westockpiled inventories. Because products are piling up, must accord the appropriate amount of authority tofunds cannot circulate and some textile enterprises have price organs at the prefecture and county levels. We musthad to cut prices in order to stir up business. For gradually establish a rational price formation mecha-example, the state has set a price of 1470 yuan per ton for nism and price regulatory system, and gradually imple-32S all-cotton cheese, but Tao Textiles in Hunan is ment a system in which "the state regulates prices forcurrently selling it for 13,300 yuan. There has been a commodities and services which have a key impact uponprice war between enterprises, so economic benefits have the people's welfare, and the market regulates prices fornaturally tumbled. Profits at Tao Textiles were 79.8 other commodities and services."percent lower in 1990 than in 1989.

3. We must work in harmony with the market and6. The readjustment of tax and interest rates have not readjust our strategy of "regulation and decentraliza-been coordinated with price policy. In recent years, this tion." Currently, price management must carry out ahas increased production and sales costs for enterprises. tidimens l readjusment of st pros aFor example, Changde Municipal Metal Corporation multidimensional readjustment of the process andhad an average of ten million yuan in outstanding loans results by which we decide what degree of "regulation orat any given time during 1990, and when the monthly deregulation" the market mechanism requires in orderinterest rate for state loans was increased from 0.66 to improve understanding of markets among the enter-percent in 1989 to 0.78 percent in 1990, the corpora- prises and to promote equal competition. Our methodstion's debt service burden grew by 144,000 yuan. How- must be flexible. For commodities where supply exceedstosebt serviment buen grlletew byr 144,000g yueman. - demand, prices must be deregulated at the right time andever, management fees collected for handling the mar- to the proper degree. For the commodities where supplyketing of metals were not adjusted correspondingly, so fl shor demand, we mus t iestlh a uaxmuthe enterprises were saddled with the loss. The retail falls short of demand, we must establish a maximumsales tax also rose from 3 percent to the current 5 price level and control interest rates within the industrypercent. If commodity prices are not adjusted corre- in order to prevent blind development and great fluctu-spondingly, there will be a direct impact upon economic ations.benefits to enterprises. 4. We must do a good job regulating the price of key

capital goods and prevent costs from skyrocketing.II Enterprises which produce key raw materials must fulfill

In order to revitalize large and medium size enterprises, production quotas and assure on-time delivery. The stateprice departments must adopt effective short and long must strengthen its management of the prices of such key

term policies. The most pressing requirement now is to means of production as electric power, petroleum, coal,do a good job in the following four areas: and steel. Its must exercise proper timing in carrying out

price readjustments. It must take into consideration the1. We must change our way of thinking and become economic benefits of production enterprises as well asmore service-oriented. Prefecture and county price the capacity of processing enterprises to absorb theseorgans must be converted from regulatory agencies into adjustments. Furthermore, these adjustments must notservice agencies. They must frequently visit enterprises, be too drastic, and they must be carried out gradually

JPRS-CAR-91-06112 ECONOMIC 4 November 1991

over an extended period of time. The two tracks in the must be regulated by price departments in conjunction"dual track price system" must be brought together as with government regulatory agencies in charge of thequickly as possible so as to keep people from taking industries in question. We must know exactly what wegoods allocated at state prices and selling them for higher are doing when we formulate and readjust monopolyprices outside the plan, thereby throwing the market into commodity prices. We must fully consider the manychaos. When key capital goods are stockpiled in exces- chain reactions set off by our decisions, and we mustsive quantities at a production enterprise for three assure a rational distribution of economic interestsmonths or more, we should allow the enterprise to be sell between monopoly industries and other industries.them at negotiated prices, and the resulting incomedifferential to enterprises could be used to offset the Large, Medium-Sized Enterprises' Pricingproduction costs. Enterprises should be allowed to return Problemsraw materials which fail to meet their specifications. As 91CE0758A Nanchang JIAGE YUEKAN [PRICINGlong as a materials enterprise fulfills supply quotas, it MONTHLY] in Chinese No 7, 15 Jul 91 pp 19-22should be allowed to take key capital goods which havebeen stockpiled for three months or more and sell them [Article by Cao Jianjun (2580 1696 6511) and Liuat negotiated prices. The extra profits thereby derived Xuming (0491 2485 2494): "Some Thoughts on Makingcould be used to compensate enterprises supplying goods the Large- and Medium-Sized Enterprises' Prices Morewithin the state plan, or they could be converted into Flexible"]price deregulation funds. [Text] The large- and medium-sized enterprises are the5. We must establish a link between the state plan and mainstay of China's economy. How to utilize the priceprices, and revitalize production marketing. Production lever to enliven those enterprises is an important issueenterprises that have obtained all the necessary raw for those who work on this country's pricing policies.materials for products which they produce within thestate plan must sell these products at the state price. I. The Pricing Problems Facing the Large- andProduction enterprises which have been unable to obtain Medium-Sized Enterprisesall the necessary raw materials for such products must 1. The large- and medium-sized enterprises face a greaterrequest that the planing department meet with the rele- share of state-set prices which are less flexible. Plannedvant government agencies in charge in order to readjust prices play a larger role among the large- and medium-the state plan in a timely manner. When a production sized enterprises, and these prices tend to be less flexible.enterprise is forced to buy raw materials at negotiated In recent years, the restructuring of the economic systemprices in order to produce goods for the state plan, these and the price reform have brought dramatic changes toenterprise should be allowed (after receiving approval the macroeconomic environment, to the market situa-from the local price department) to calculate the extra tion, and to the production conditions, and the mostprice paid for these raw materials as part of their significant change has been the soaring production cost.production costs. When the production enterprises pro- The existing state-set prices do not reflect these changes,duce goods for the state plan for which no particular and as a result, there are huge "policy-related losses" inwork unit has been lined up to take delivery of these the production and operation links, and the samegoods, or when a work unit does not take delivery on amount of labor no longer generates the same amount oftime, these enterprises should be allowed to sell such profit.goods for their own account. 2. Some enterprises' inputs are more costly than the goods

6. We must make sure economic regulation and control they produce. The price of input is ususally compared tois carried out in an organized manner, and policy must the price of output in terms of the total price. The twobe coordinated. Economic levers (taxes, credit, etc.) and factors that affect the total price are: (a) The propor-price levers both play a role in macroeconomic regula- tional shares of planning versus market regulation; (b)tion and control, and they are closely interrelated. The the general price level. The best combination for anadjustment of taxes and interest rates directly affect enterprise is one in which a large portion of its inputs areenterprise costs as well as price levels. For this reason, under planned prices and the price level is relatively lowprice departments must participate actively in the for- while a large portion of its output is under marketmulation and readjustment of tax and interest rates, and regulation and the price level is fairly high. The actualthey must give full consideration to expected price combination may vary, but production enterprises thatchanges. As the state readjusts tax and interest rates, it use more capital goods will often find that a largermust readjust price policies in an appropriate and timely portion of their output than their inputs are under themanner so as to assure a reasonable level of profits for mandatory plans, and from the outset, this policy is notenterprises. to their advantage. Enterprises generally report that they

actually receive only 60 to 70 percent of the planned raw7. We must exercise strict regulation of monopoly prices materials they need, and often they receive only the typesand support equal competition within industries. Price of materials of which they are not in urgent need. Inlevels in such monopoly industries as electric power, order not to waste their planned quota, enterprises arepetroleum, and rail transport directly affect costs and forced to accept those planned products which also costprices in other industries. Monopoly commodity prices them a sum of storage fee and interest on funds being

JPRS-CAR-91-0614 November 1991 ECONOMIC 13

used. In the course of restructuring the pricing system, to actual productive capacity, and the portion of plannedbecause of a chain reaction, the prices of many enterprise goods enterprises are permitted to market on their own.inputs have gone up, which has made the price of Under the circumstances, of course, no one has givenenterprise input even more out of line with the price of any thought to linking prices to the contract system.output.3. The double-track pricing system makes enterprise 5. Taxation is not coordinated with pricing. Currently,3Teou ble-trac curate and is also an important factor more categories of products are subject to enterprisee

behind enterprises' improper pricing behavior. Due to the circulation tax than ever before, the tax rate is higher,wide gap between planned and market prices, at a time and enterprises still have to pay taxes on their after-taxof rapid economic development and in a relatively tight retained profit, and adding the other appropriations andmacroeconomic environment, enterprises will make charges, many enterprises are going under because ofevery effort to increase the portion of higher-priced these burdens. For example, in the automotive industry,market-regulated goods in order to reap more profit. But there are five types of tariffs which are not included in

under the conditions of economic contraction and the circulation tax, and most enterprises have to pay 35market slump, enterprises will turn to the government different types of taxes, so that after deducting andinstead and demand that the planned prices be raised to paying a variety of taxes and fees, for every 100 yuanoffest the loss incurred in the market. Such behavior retained profit, every 100 yuan depreciation fund, andhides the fact that the types and the quality of products every 100 yuan in loan funds, enterprises only receive athey produce are not meeting market demand. If this net of 6.54 yuan, 32.24 yuan, and 39.71 yuan, respec-attempt to "make a profit by raising prices" does not tively. Out of the sum of 300 yuan, only 78.49 yuan iswork, enterprises are doomed. actually available for use on enterprise development.

Take the Capital Iron and Steel Company as another4. There is a conflict between the rigid contracts and the example. The circulation tax it paid as a percentage of itsneed for flexible prices. Currently, when enterprises enter realized profit tax [as published] came to 52.6 percent ininto the responsibility contracts, they must fix the 1988, 64.2 percent in 1989, and 82.7 percent in Januaryamount of profit tax for a specific period of time, They 1990. There is a close relationship between taxes andcannot impute the estimated price change into the con- prices. As taxes are being raised, many enterprises willtract, nor can they readjust the figures as soon as prices shift a portion of the tax burden to the consumers bychange; otherwise the contracts will lose their legal clout, raising prices, and the result is a general rise in the priceSince the profit tax is fixed, a price change may cause level. Since most large- and medium-sized enterprisesenterprises' realized profit to be larger or smaller than must comply with mandatory prices, they cannot shifttheir contract base. If the profit is larger than the the increased tax burden to someone else by raisingcontract base, it may appear to be a windfall for enter- prices. Although this plays a positive role in stabilizingprises, but a price change is but a shift in value and does prices, because the tax increase exceeds what enterprisesnot create new value. One enterprise's profit is another's can afford, these enterprises are losing their retainedloss, and the state loses the profit tax due from both profit, making it impossible for them to fulfill theirenterprises because of such price change. On the other contracts.hand, if profit is smaller than the contract base, enter-prises may suffer huge losses, but they will not neces- 6. The large- and medium-sized enterprises'depreciationsarily try to improve their operation to offset this allowance is too low, and because depreciation representsadverse external change in condition. Instead, they may the replacement price of their fixed assets, this has antreat this "change in objective condition" as an impor- aderepefet on their upgr d and replacem ntant bargaining chip when they ask the department in adverse effect on their upgrading and replacement ofcharge to readjust the contract base or find some other facilities and equipment and has slowed enterprise tech-ways to get financial support from the government. nological transformation. Depreciation cost is one corn-Thus, we often hear from the contracting enterprises ponent of cost-pricing. In 1979 the state stipulated thatthat, one, because of higher price of raw materials, the following enterprises may keep all of their deprecia-production cost is higher, so that enterprises' realized tion funds: Enterprises with less than 1 million yuan'sprofit and retained profit are lower, which in turn have worth of fixed assets, enterprises under the jurisdictiondampened their production enthusiasm; two, most large- of the commercial, grain, cultural and foreign trade,and medium-sized enterprises have limited power to set supply and marketing cooperative, post and telecommu-prices and are allowed to market too little of their own nications, goods and materials, and construction depart-products. These prevent them from utilizing the market ments, and timber-felling and mining and excavationmechanisms effectively to regulate production, and this enterprises which obtain their renovation and transfor-in turn has offset the positive effects of the contract mation funds based on output. All other enterprises mayresponsibility system. retain 50 percent of their depreciation fund and hand

over 30 percent to the central government and 20Furthermore, there is no systematic way to determine percent to the local treasury or to the department inenterprises' contract base, the incremental profit tax charge. Meanwhile, it is stipulated that the centralizedrate, the distribution of retained profit, the link between depreciation funds will be returned to enterprises to bewages and profits, the ratio between mandatory planning spent on key construction projects.

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The above stipulations make the amount of depreciation no wonder the large- and medium-sized enterprises arefunds obtained by the large and medium-sized enter- operating with obsolete equipment, technology, andprises and by the small enterprises unequal. Since most technique. The table below shows the conditions ofof the depreciation funds have to be handed back to the equipment in China's large- and medium-sized enter-higher authorities, and the depreciation rate is fairly low, prise today:

The Condition of Equipment in China's Large- and Medium-Sized EnterprisesItem Year Installed-Equipment Was Manufactured

1980's 1970's 1960's 1950's Pre-PRC Era

Industry (national %) 32.99 41.03 13.43 8.6 0.95

Engineering Industry (national %) 24.73 46.46 17.97 10.51 0.33

Data based on information gathered in an industrial survey.

II. Causes of the Problem (2) The principles of pricing based on cost and pricingbased on supply and demand in the market are in direct

The pricing problems in the large- and medium-sized conflict with each other. For example, if enterprises'enterprises may appear to be caused by changes in production cost is rising but the market is weak and salesexternal conditions, but in fact they are caused by many is sluggish, the set-price will be unrealistic, and enter-policy-related and system-based factors. prises will not be able to use it. However, if the market is

1. The large- and medium-sized enterprises are disadvan- brisk, the fixed price may benefit the producers andtaged by the pricing policy, businesses, but the consumers may be paying for some

unnecessary enterprise expenses, and this will lead to aFirst, China's system of planned commodity economy is chain reaction, causing enterprises to employ high-drawn up in such a way that more planned regulations priced inputs to produce low-priced outputs, which inare put on the large- and medium-sized enterprises while turn will create a double-track system where high pricesleaving the small enterprises to market regulations. In lead and chase each other, enticing enterprises to seekterms of the pricing policy, this means more of the "higher prices efficiency."former's products are subject to planned prices, and (3) Enterprises have different costs, and if there is a bigmore or all of the latter's products are regulated by the difference between enterprises' actual cost and the costmarket. Relatively speaking, the pricing policy is much used to determine prices, they will be competing onless flexible with the large- and medium-sized enterprises unequal footing, and cost will become another excuse forthan with the small enterprises. enterprises to demand an increase in prices.

Second, the fact that prices are determined by different The fact of the matter is, the state has no choice but tostate bodies has resulted in policy-based disparities. The adhere to the cost-pricing principle. When costs areprices of most goods produced by the large and medium- rising, it is impossible not to raise prices. Although to ansized enterprises are determined directly at the central extent China's current enterprise operating mechanismslevel or by the province-level, the autonomous region, or still encourage enterprises to seek profit, they do notthe municipal-level governments. Meanwhile, goods pro- afford enterprises the right and the responsibility to takeduced by the small enterprises are priced by lower-level care of their own losses as they drift in a sea of commod-government departments. To stablize prices, the state ities, because if enterprises must digest and absorb theoften controls the price of goods which have greater cost increase, many will lose money and go bankrupt.impact on market prices, and inevitably the large- and China lacks the bona fide enterprise bankruptcy andmedium-sized enterprises are the prime targets. social protection mechanisms, and therefore enterprises2. The principle of cost-pricing has its inherent flaws. have always tried to stay on the "high road" when it

comes to the relationship between cost and prices.Generally speaking, when the state determines or read- 3. There is little coordination between the existingjusts a price, it often takes into account the changes in planned system and market regulation.production cost, or at least it will make cost its primaryconsideration. Naturally, cost is the most basic, the China's existing planned system has two direct impactindispensible basis in determining prices. However, on enterprises: First, the system tries to create an in-kindmaking cost the prime factor in pricing has a number of balance. The state hands down many mandatory plans toflaws: control enterprise production and sales, which renders

enterprises without the flexibility to face the market. In(1) The principle of cost-pricing requires that there exists recent years, although this kind of mandatory planninga way to control cost. Practice proved that relying on has been sharply curtailed, the long-time practice ofgovernment policies to control cost externally is not the in-kind balancing has created a kind of protectivemost effective approach. The loopholes in cost control external environment, and once enterprises lose thiswill continue to push product prices upward. protection, they cannot immediately adjust to the

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market demands, and if the share of market regulation is follow the market regulation price. No matter whichincreased and so on, it will hamper the state's effort to pricing format is used, the government should reservemaintain in-kind balance at the macro level. Thus, the the right to choose the pricing format and to use admin-state must impose some control.